Rescuing proxy voting from the Third World

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) has successfully piloted an electronic system that could drastically reduce the manual processing and risk of error in counting shareholder votes, but according to Dean Paatsch, director at Riskmetrics, it will take “a major public mistake” before the industry moves away from its “third-world systems”.

Shareholders absent from a company’s annual general meeting currently lodge their preferences via proxy votes, in a system that is still largely dependent on paper faxes. Shareholders receive no confirmation that their vote has been received or counted, and manually processing multiple instructions on thousands of voting forms is inherently prone to errors.

A high-profile example of this occurred in the US in early August when the votes of Yahoo’s largest shareholder, the Capital Group, went missing. Capital Group became suspicious after votes in favour of keeping Yahoo chief executive officer Jerry Yang were tallied at 85 per cent, despite the fact that the group, which holds a 16 per cent stake in the company, voted against him. Capital Group asked its proxy agent to check whether the votes had been received, and a recount found support for Yang to be only 66 per cent. While the error did not change the outcome on this occasion, “the chance that control of a company could pass as the result of a mistake is a huge liability,” Paatsch at Riskmetrics says.

The electronic proxy votes developed by SWIFT would automate the voting process end-to-end; from the beneficial owner to the trustee, to the fund manager, the global custodian, the sub-custodian, the registrar and finally the company. With the same, standardised message sent automatically between parties, there is no need to reinterpret and rekey information at each stage, a cumbersome process where errors occur. Tim Hamer, commercial manger at SWIFT, says that the true advantage comes when each of the counterparties is connected electronically. This would create a full audit trail and increase the time that shareholders have to cast their votes.

After two years of development, SWIFT ran a pilot with Broadreach, Riskmetrics, BNP Paribas, Clearstream, Dexia, Standard Chartered, and Manifest. Some are ready to move now, while others are replacing legacy systems and building from the bottom rather than on top of old systems. “This will happen,” Hamer says. “It is just a question of how quickly. “Many have other priorities at the moment, and are likely to put off the expense of implementing a new system until there are more counterparties.”

Paatsch says that funds managers and custodians are preparing to migrate to electronic proxy voting. The problem, he says, is that there is no business case for the registrar. “I hope they will show leadership on this, but my belief is that it will take a major public mistake before they come into the 21st century.” Greg Dooley, managing director at ComputerShare, says that the company is doing its best to steer the industry towards an electronic solution.

In August, ComputerShare went live with Investor Vote, an electronic voting facility that allows shareholders to register votes online. But according to Paatsch this is classic registry behaviour: “It appears to be an electronic process, but in the end the votes still need to be printed out and manually entered,” he says. “This is not a solution for a sub-custodian. It doesn’t accept split votes, and it requires an online login for each company; can you imagine trying to maintain 500 sets of passwords and login details?”

Dooley says assertions that registrars are holding back the move towards automation are “absolutely not true…We would love to see the industry move that way; it is not a cost issue, we spend millions every year in research and development to improve our service.” SWIFT visited the offices of ComputerShare last month, and Dooley said that while he had not yet seen the detail, the company would be happy to be involved with an end-to-end electronic solution.

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